If Marginal Propensity to Consume (MPC) is 0.75, what will be the value of Investment Multiplier ?
Answer & explanation
Correct answer: option 1
The correct answer from the option (1) : 4
The investment multiplier is used to determine the total increase in real GDP that results from an initial increase in investment. It is calculated using the formula :
Investment multiplier = $\frac{\Delta Y}{\Delta I}$ = $\frac{1}{1-mpc} $
Given that the Marginal Propensity to Consume (MPC) is 0.75, we can substitute this value into the formula :
Investment multiplier = $\frac{1}{1- 0.75}$
Investment multiplier=1/0.25 =4 times
Therefore, the value of the investment Multiplier is 4, which corresponds to option (1).